Once A Stock-Market Darling, Online Delivery Company Meituan Has Come Under Mounting Regulatory And Public Scrutiny In China.

By Chong Koh Ping And Xie Yu

Once A Stock-Market Darling, Online Delivery Company Meituan Has Come Under Mounting Regulatory And Public Scrutiny In China, souring investors on its growth prospects amid a broader crackdown on the country’s powerful technology sector. On Tuesday, shares of Meituan tumbled nearly 10% before paring some losses to close at a seven-month low. The previous day, the shares had fallen 7%. The declines took Beijing-based Meituan’s market capitalization to the equivalent of about $195 billion.

Three months ago, Meituan was flying high with a market capitalization exceeding $340 billion, according to FactSet, as Chinese consumers swarmed to its mobile app to purchase vegetables, groceries and household goods in bulk. In April the company raised nearly $10 billion from investors to fund new technology and ambitious expansion plans. Even after the recent tumble, Meituan is China’s third-most-valuable listed internet company, behind videogame developer and social-media company Tencent Holdings Ltd. TCEHY -4.20% , and e-commerce firm Alibaba Group Holding Ltd.

On Monday evening, the Shanghai Consumer Council, a quasi-government body that protects consumer rights, said it had summoned Meituan representatives to a meeting and told the company to address problems that had sparked a litany of complaints from consumers. Representatives of Pinduoduo Inc., a fast-growing e-commerce company that has become one of China’s top online shopping sites, were also called to a meeting by the council and told to rectify problems that included sales of counterfeit goods. Pinduoduo’s Nasdaq-listed shares plunged 9% in U.S. trading on Monday after the news.

Meituan, which operates an online marketplace for restaurants and other merchants, was instructed to resolve issues related to refunds and its failure to fulfill food-delivery and grocery orders. The council also said the company had misleading content on its app and told it not to take advantage of its dominant market position by charging merchants unreasonable amounts. Meituan and Pinduoduo both agreed to conduct self-examinations and revise their businesses according to the council’s requirements, it said.

A day earlier, an internet controversy developed over a social-media post by Meituan’s founder and chief executive, Wang Xing, containing an ancient Chinese poem that refers to book burning by a Qin dynasty emperor. Some internet users interpreted Mr. Wang’s post as veiled criticism of China’s government. The poem mocked an emperor who silenced opposition by intellectuals but was later overthrown by a couple of military men who didn’t read books.

Mr. Wang subsequently deleted the post and said on Fanfou, an obscure Twitter -like social-media platform he founded, that the poem was supposed to be a reference to Meituan’s competitors. “What could upstage the delivery business could be companies or business models that we have yet to discover,” he wrote. Adding to the issues surrounding Meituan, a video that appeared Monday on popular Chinese news aggregator Sina showed two Beijing municipal government officials questioning Meituan representatives about what the company was doing to safeguard the welfare of its millions of delivery workers who have to pay for accident and health-insurance coverage.

The video carried the logo of Beijing TV, a state-backed satellite broadcaster. A Meituan spokesperson confirmed the authenticity of the video. In late April, the station aired a program featuring a government official who worked as a delivery rider for Meituan and earned the equivalent of $6.38 for a 12-hour shift. Analysts from Citigroup said in a report Tuesday that the new requirements for Meituan and Pinduoduo from the Shanghai Consumer Council are consistent with overall regulatory stances toward internet platforms in China. A likely outcome could be slower user and revenue growth for the companies, which may have to spend more to fix problems and comply with the requirements, they added.

Two money managers who follow Meituan’s stock moves said the company could face higher costs of operating its business if it has to increase the benefits it provides to its delivery workers or treat them more like employees. Chinese regulators have made a concerted push to get the country’s technology giants to compete fairly and protect the interests of consumers and other stakeholders. Meituan is also in the crosshairs of China’s top commerce regulator, the State Administration for Market Regulation, which began a probe last month into the company on suspicion of monopolistic behavior. Meituan has said it is cooperating with the investigation. Meituan and Pinduoduo were among nearly three dozen of China’s largest tech companies to publicly pledge to comply with the country’s antimonopoly laws recently, after the commerce regulator fined Alibaba $2.8 billion and halted the initial public offering of financial-technology company Ant Group Co.

This news was originally published at WSJ.